Trading Rule # 3 & 4

Trading Rule # 3: Well Defined Exit Strategy

Exit strategy is something you will read more often in most of the posts in this site, the reason is simple without a proper exit strategy your entire trading might go in a thick soup. Using stop loss courageously while in trade can be one of your most profitable decisions... Believe me!

Before entering any position, traders should have an exit strategy in place. This should be included in the trading plan and define how the trader will get out of both winning and losing positions. Many traders agree that money is made in the exit. This means that regardless of where a position is entered, it’s the exits that determine if it will be a winning or losing trade. 

While we often think of trade exits in terms of dollar-based profit targets and stop losses, there are other methods for determining exits. A trading plan could utilize a time- or activity-based exit, such as closing the trade after a certain number of bars have printed, after a specified amount of time has elapsed, or at the end of the trading session. Exits  also can be based on some type of market activity or technical analysis. For example, a trade could stop-and-reverse if a technical indicator gives an opposing signal.
Regardless of approach, it is important to have an exit strategy in place before entering any trade. It can mean the difference between not only a winning and losing trade, but a winning and losing business.




Trading Rule # 4: Capture the Market Movement

As we have discussed in previous post that most of the traders enter into stock market to trade with their gut feeling, and buy or short in first 15-20 minutes without even proper introspection of the market movement, here we will discuss in some more detail about movement watch

Novice traders often book profits too quickly because they want to enjoy the winning feeling. Sometimes even on the media one hears things like, "You never lose your shirt booking profits." I believe novice traders actually lose their account equity quickly because they do not book their losses quickly enough.
Knowledgeable traders on the other hand, will also lose their trading equity -- though slowly -- if they are satisfied in booking small profits all the time. By doing that the only person who can grow rich is your broker. And this does happen because, inevitably, you will have periods of draw downs when you are not in sync with the market. You can never cover a 15-20% draw down if you keep booking small profits. The best you will do is be at break even at the end of the day, which is not the goal of successful trading.
A trading account that is not growing is not sustainable. Thus when you believe you have entered into a large move, you need to ride it out till the market stops acting right. Traders with a lot of knowledge of technical analysis, but little experience, often get into the quagmire of following very small targets, believing the market to be overbought at every small rise  --  and uniformly so in all markets. 

Such traders are unable to make money because they are too smart for their own good. They forget to see the phase of the market. Not only do these traders book profits early, sometimes they even take short positions believing that a correction is "due". Markets do not generally correct when corrections are "due".
The best policy is to use a trailing stop loss and let the market run when it wants to run. The disciplined trader understands this and keeps stop losses wide enough so that he is balanced between staying in the move as well as protecting his equity. Capturing a few large moves every year is what really makes worthwhile trading profits.